Academic journal article Journal of Accountancy

Full Deduction on Meal Reimbursements

Academic journal article Journal of Accountancy

Full Deduction on Meal Reimbursements

Article excerpt

Under IRC section 274(n), employers generally may deduct only half their reimbursements to employees for meals and entertainment. But employee-leaseback arrangements--notably in the trucking industry--have mapped a route through the section's several exceptions.

Many smaller trucking carriers use a professional employer organization (PEO) to reduce their costs. One PEO, Transport Labor Contract/Leasing (TLC), in 2004 had 5,563 driver-employees leased to 453 trucking company clients. TLC paid per diem reimbursements to its drivers and billed its trucking company clients for these amounts. In 2004 the Tax Court said TLC was subject to the 50% limitation because it, rather than the trucking companies, was the "common-law employer." Although the trucking companies made recommendations on which drivers to hire, the Tax Court noted that TLC screened and eliminated some candidates and retained the fight to lease a driver to any of its trucking clients. TLC appealed to the Eighth Circuit.

Result. For the taxpayer. If the reimbursement is wages, the 50% limitation is on the employee, but the limit shifts to the employer for expense reimbursements. However, an employer can escape the limit if the payments qualify under the IRC section 274(e)(3) exception, because they are "paid or received by one person ... under a reimbursement or other expense allowance arrangement with another person other than an employer." The appeals court said TLC qualified for this exception because it was the employer performing services for a "person other than an employer" under a proper reimbursement arrangement. …

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